BETWEEN:
and
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
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Appeal heard on August 2, 2005, in Quebec, Quebec.
Before: The Honourable Justice Alain Tardif
Appearances:
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JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 2003 taxation year is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 8th day of November 2005.
"Alain Tardif"
BETWEEN:
CHRISTIAN LECLERC,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
[1] This is an appeal relating to the 2003 taxation year. A reassessment was established on August 30, 2004; it was confirmed on January 11, 2005.
[2] To establish and maintain the reassessment for the 2003 taxation year, the Minister of National Revenue (the "Minister") made the following assumptions of fact:
[translation]
Equivalent-to-spouse credit
a) The Appellant and Ms. Stéphanie Michaud celebrated their marriage on November 16, 1985 at Baie-Comeau;
b) The Appellant and Ms. Stéphanie Michaud are the parents of a daughter, Catherine, born on June 14, 1990;
c) The Appellant and Ms. Stéphanie Michaud have lived separately since July 1997;
d) A divorce judgment between the Appellant and Ms. Stéphanie Michaud was rendered on April 15, 1998 by the Honourable Laurent Guertin sitting in the Superior Court;
e) In a judgment on a motion to modify accessory measures rendered by the Honourable Jacques Dufour sitting in the Superior Court on May 20, 1999, the custody of the minor child Catherine was entrusted to the Appellant and Ms. Stéphanie Michaud had to pay annual support of $1,105.51 to the said Appellant for the child Catherine;
f) In response to the motion filed by Ms. Stéphanie Michaud to modify accessory measures, the Honourable Judge Louise Moreau, sitting in the Superior Court, rendered a judgment on November 19, 2003 awarding custody of the minor child Catherine to her mother and condemning the Appellant to pay Ms. Michaud child support of $6,423.02 per year, effective September 1, 2003;
Legal expenses
g) In filing his income tax return for the year in dispute, the Appellant claimed, as a deduction for legal expenses, legal fees for a total of $2,940;
h) The voucher supporting the claim of $2,940 consisted of a receipt dated November 24, 2003 and signed by Ms. Julie Paré, on behalf of the Thivierge Gagnon law firm;
i) The legal fees were incurred by the Appellant regarding a motion to change custody and fix child support.
[3] All the assumptions of fact were essentially admitted, except that the Appellant specified, regarding paragraph 6 c), that he and Stéphanie Michaud had been separated since January 1997 and not since July 1997 as indicated.
[4] The Appellant also expressed reservations regarding the wording of paragraph 6 i) whereby legal fees were incurred by him regarding a motion to change custody and fix child support.
[5] The appeal raises two issues. The first is to determine whether the Appellant had the right to claim, in the calculation of the non-refundable tax credits for the 2003 taxation year, an equivalent-to-spouse credit for a wholly dependent person regarding his daughter Catherine.
[6] The second issue is to determine whether the legal expenses of $2,940 incurred by the Appellant in a motion to change custody and fix child support are deductible in the calculation of his income for the 2003 taxation year.
[7] In support of his arguments, the Appellant essentially argued that the provision that did not allow him to claim non-refundable tax credits for the 2003 taxation year was unreasonable, unjust and totally unacceptable, given that he had responsibility for the child for the first 10 months of the year. The Appellant maintained that because he had not been responsible for only 42 days of the year, he was refused the entire credit for 2003.
[8] In his opinion, he should at least be entitled to a proportion of the credit equivalent to the 323 days of the year during which he assumed sole custody of Catherine.
[9] He also argued that it would be illogical for a person to be entitled to the credit during the year of separation, even if he pays child support, but that after a change in custody, which has an effect similar to separation in the sense that custody is entrusted to one of the parents, with the other parent having to pay child support, he would not longer be entitled to this credit.
[10] As for the deductibility of the legal expenses of $2,940, the Appellant maintained that he satisfied all the conditions required and published in various Interpretation Bulletins to be entitled to it.
[11] For the first issue in dispute, namely the right to the non-refundable tax credit for a wholly dependent person, the Minister, in order to refuse this, bases his position on subsection 118(5) of the Income Tax Act (the "Act"), which reads as follows:
118(5) Support -- No amount may be deducted under subsection (1) in computing an individual's tax payable under this Part for a taxation year in respect of a person where the individual is required to pay a support amount (within the meaning assigned by subsection 56.1(4)) to the individual's spouse or common-law partner or former spouse or common-law partner in respect of the person and the individual
a) lives separate and apart from the spouse or common-law partner or former spouse or common-law partner throughout the year because of the breakdown of their marriage or common-law partnership; or
b) claims a deduction for the year because of section 60 in respect of a support amount paid to the spouse or common-law partner or former spouse or common-law partner.
[12] This issue was discussed in several cases before the Tax Court of Canada, in particular Nelson v. The Queen, [2000] FCR No 1613 (QL), [2000] 4 C.T.C. 252, 2000 DTC 6556 (FCA); Peeck v. The Queen, [1998] A.C.I. No 453 (QL), [1998] 4 C.T.C. 2279, 98 DTC 3426 (T.C.C.); Sherrer v. The Queen, [1998] A.C.I. No 62 (QL), [1998] 2 C.T.C. 3209 (T.C.C.); Lafrance v. The Queen, [2001] A.C.I. No 548 (QL), [2001] 4 C.T.C. 2575 (T.C.C.); Belisle v. The Queen, [2003] A.C.I. No 765 (QL), [2004] 4 C.T.C. 2175 (T.C.C.); Brisson v. The Queen, [2003] A.C.I. No 411 (QL), 2003 TCC 438.
[13] Unfortunately for the Appellant, the Act is clear regarding the equivalent-to-spouse credit for a wholly dependent person; subsection 118(5) makes it impossible for a taxpayer to claim the equivalent-to-spouse credit for a wholly dependent person if he is required to pay support for this person and if he lives separately from his spouse throughout the year.
[14] In this instance, neither the Appellant, nor Ms. Stéphanie Michaud would be entitled to the equivalent-to-spouse credit for a wholly dependent person for the 2003 taxation year because both paid support for their daughter at some time during the year.
[15] In terms of equity, it would be desirable that Parliament amend the Act to provide that at least one of the two parents be entitled to the credit. Since the Tax Court of Canada is not a court of equity, it is up to Parliament and not to this Court to amend the Act. As Sobier J. stated in Sunil Lighting Products c. Canada, No 91-125(UI), October 5, 1993, [1993] A.C.I. No 666 (T.C.C.), at page 5:
[translation]
The cases clearly indicate that the Tax Court of Canada is not a court of equity and that its jurisdiction depends on the provisions of its enabling legislation. [...] In the case of appeals regarding income tax, the powers of the Court are set out in subsection 171(1) of the Income Tax Act. These powers thus consist of determining whether the assessment was established in accordance with the provisions of the Income Tax Act.
[16] Consequently, as long as the legislator does not amend the Act, the Tax Court of Canada must apply it in all its rigour when the provision of the Act is clear, as unjust as it may seem.
[17] As for the argument that the credit should be applied proportionally to the two parents according to the number of days during which the child resides with or is under the custody of one of them, once again case law is unequivocal. It is up to Parliament to legislate and provide for such a regime.
[18] Sarchuk J. explains the application of this principle in subsection 118(5) very well and in detail in Young v. The Queen, No 2002-1673(IT)I, January 23, 2003, 2003 DTC 169, [2003] 2 C.T.C. 2547 (T.C.C.), in paragraphs 11 to 15, stating that if the legislator had intended to allow proration of the credit, they would have done so clearly and unequivocally.
[19] Consequently, the appeal must be dismissed with respect to the equivalent-to-spouse credit for a wholly dependent person.
[20] Regarding the deduction claimed for legal expenses, the case Nadeau v. M.N.R. 2003 DTC 5736 (FCA) is an excellent citation in that it summarizes the jurisprudence on deductibility of legal expenses incurred in matters of support. In this regard, I take the liberty of quoting Judge Noël of the Court of Appeal, paragraphs 14 to 18 and 30 to 34:
14 The cases have consistently held for more than 40 years that the right to support, once established by a court, is "property" within the meaning of subsection 248(1) of the Act, and that the income from such support constitutes, in the hands of the person receiving it, income from property (see in particular Boos v. Minister of National Revenue (1961), 27 Tax A.B.C. 283; R. v. Burgess, supra; Bayer v. M.N.R., [1991] 2 C.T.C. 2304 (T.C.C.); Evans v. Minister of National Revenue, [1960] S.C.R. 391 and Sembinelli v. The Queen, [1994] 2 C.T.C. 378 (F.C.A.)).
15 The definition of "property" in subsection 248(1) reads as follows:
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« biens » . - « biens » Biens de toute nature, meubles ou immeubles, corporels ou incorporels, y compris, sans préjudice de la portée générale de ce qui précède : |
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"property" means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes |
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a) les droits de quelque nature qu'ils soient, les actions ou parts; |
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(a) a right of any kind whatever, a share or a chose in action, |
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b) à moins d'une intention contraire évidente, l'argent; |
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(b) unless a contrary intention is evident, money, |
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c) les avoirs forestiers; |
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(c) a timber resource property, and |
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d) les travaux en cours d'une entreprise qui est une profession libérale. |
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(d) the work in progress of a business that is a profession; |
(My emphasis)
16 Thus the courts have consistently held that income from support payments is computed by reference to the regime applicable to income derived from property (or from a business) that is found in subdivision b of the Act. Under this regime, an expenditure incurred in order to constitute a source of income is a payment on account of capital and its deduction is prohibited (see paragraph 18(1)(b)). However, an expenditure incurred in order to earn income from this source (i.e. after it has originated) is referred to as "current" expense which falls within the exception under paragraph 18(1)(a ):
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18(1) Dans le calcul du revenu du contribuable tiré d'une entreprise ou d'un bien, les éléments suivants ne sont pas déductibles : |
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18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of |
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[...] |
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. . . . . |
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a) les dépenses, sauf dans la mesure où elles ont été engagées ou effectuées par le contribuable en vue de tirer un revenu de l'entreprise ou du bien; |
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(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property; |
(My emphasis)
17 This regime, as it was applied by the courts over the years, has meant that from the perspective of the recipient, an expenditure, the purpose of which is to give rise to a right to support is a capital expenditure and therefore cannot be deducted. But an expenditure incurred in recovering an amount owing under a pre-existing right is a "current" expense and may therefore be deducted.
18 Conversely, the expenses incurred by the payer of support (either to prevent it from being established or increased, or to decrease or terminate it) cannot be considered to have been incurred for the purpose of earning income, and the courts have never recognized any right to the deduction of these expenditures (see, for example, Bayer, supra).
[...]
30 As Judge Bowie noted in Sabour, supra, this is the treatment that the Minister has advocated and applied for more than 40 years. It is logical to assume that if this treatment was in some way contrary to Parliament's wishes, an amendment would have been brought.
31 From the governmental standpoint, the treatment of support-related expenditures is of more than passing interest. This approach, which has endured over 40 years, has an impact on public finances and raises important questions of social policy. The state of the law in the matter cannot have gone unnoticed. Notwithstanding his ardent plea, Parliament clearly cannot have the intention attributed to it by Archambault T.C.J.
32 The amendments to the Act that accompanied the decision made in 1997 to no longer tax support payments intended for the children of the marriage are, in this regard, unequivocal. This decision could have had a significant impact on the deduction that support recipients could claim under paragraph 18(1)(a), since paragraph 18(1)(c) stipulates that no expense may be deducted "in connection with property the income from which would be exempt".
33 To maintain the right to the deduction, Parliament amended the definition of "exempt income" [...] in subsection 248(1) to exclude the part of the support that is intended for children, even if it is now non-taxable. Clearly, this amendment would be pointless if Parliament was of the view that income from support was not income from property within the meaning of subdivision b.
34 It appears from this that not only has Parliament accepted the solution adopted by the courts over the years, it has intervened to preserve that solution when confronted with an amendment that effectively would have precluded it. This jurisprudential solution, I repeat, is a function of the fact that the income from a support payment is income from property, and as such the expenses incurred in order to earn this income may be deducted.
[21] Thus, the legal expenses incurred to oppose a motion for support and change of custody are not deductible because these expenses are not incurred to earn income from property.
[22] In this instance, the legal expenses were incurred to oppose a motion to change child custody and fix child support, which clearly does not constitute expenses incurred to earn income. Once again, the Appellant is not entitled to the deduction claimed.
[23] Consequently, the appeal must be dismissed, without costs.
Signed at Ottawa, Canada, this 8th day of November 2005.
"Alain Tardif"
Tardif J.
Translation certified true
on this 31st day of March 2006.
Jean Pierre Koch, LL.B., Translator